My beginner's guide to trading will answer most of the questions that beginners may have. You don’t have to figure everything out on your own, because in this article I have collected the most valuable information about trading, after studying which you can feel more confident.
What is the Forex market?
What is Forex? Usually when I meet new people and tell them what I do, many have no idea what forex trading is all about. This is quite surprising considering how big the forex market is.
For example, when you visit another country, you need to make a currency exchange in order to make any purchases in that place.
Unlike the stock market, which is centralized, forex does not have its own center and is electronically linked between various brokers and banks.
The biggest players in Forex are banks, which are also market makers. Next come large corporations that buy currency to hedge their risks. And finally, at the very end are retail traders or ordinary people who buy and sell currencies.
Daily forex trading exceeds $5 trillion, dwarfing all other financial markets.
Forex is an abbreviation for foreign exchange. When one currency changes to another, a forex transaction occurs. For example, this can happen at currency exchange counters at the airport. Or when a company imports or exports goods. Even when you buy some product on the Internet from another country. These are all transactions with foreign currency. There are a huge number of transactions taking place every day, which is why the daily Forex turnover is so large.
Most of the daily volume of currencies traded on forex is speculative trading. Speculation is what we do when we engage in forex trading.
If you decide that one currency will increase in value relative to another, you buy it. If you think the value of a currency will decrease, you sell it. In such a large market, it is always easy to find buyers or sellers who are ready to take the opposite side in your transaction.
Trading on the Forex market is different from any other financial market:
- Trading takes place around the clock, five days a week, except weekends and holidays.
- Opportunity to make a profit in rising or falling markets.
- Trade with high leverage and low margin requirements.
What does this mean for us?
Forex is an excellent choice for those who do not have much time to trade. Other financial markets are extremely demanding, while the forex market is more accessible. You can trade when you get home from work, devoting only half an hour a day to trading.
You will also have the opportunity to use high leverage, allowing you to earn large amounts of money per trade. However, the downside of high leverage is that you can also experience large losses. Therefore, it is very important that you know how to trade before you start trading with real money. You will have to have a trading plan and master the rules of money management, as well as risk management.
Why is forex trading not as popular as stock trading?
The Forex market has existed since ancient times. The Romans regularly carried out currency exchange transactions.
Why then is forex trading not as well known as stock trading?
Forex trading has not always been so accessible to retail traders. Personal computers opened up access to forex trading platforms to everyone about 20 years ago. On the other hand, the stock has been trading for almost 100 years. So, even though the forex market is very large, retail forex trading is still relatively new and not as popular as stock market trading.
What are the advantages of trading the Forex market?
Forex has advantages that make it special among other financial markets.
High liquidity. According to the Bank for International Settlements, forex is the largest financial market in the world with total liquidity of $5 trillion per day. This means that with such liquidity we can enter the market at any time and open trades without fear of slippage.
Low entry price. Most forex brokers will allow you to comfortably trade up to $100.
Optimal risk management. You can trade micro lots at 0.01 of a standard lot, which is a very small amount of money you are risking. Also, unlike stocks, there are rarely large gaps in the forex market, so you won't lose more money than you planned.
Trade at any time convenient for you. Forex is open 24 hours a day, five days a week, except weekends. You can open trades at any convenient time of the day or night.
Low transaction costs. Unlike the stock market, in forex, most brokers will not charge you commissions for making trades.
Features of Forex trading
The foreign exchange market, also called forex or FX for short, is the most liquid financial market in the world. Here, only currencies that represent the national economy are traded. The forex market has the highest daily trading volume compared to other global markets.
Currency exchange has always existed, but the modern foreign exchange market began to develop starting in the 1970s after the dollar was no longer pegged to gold.
The US dollar has always dominated the modern market due to its role as the primary base currency and status as the global reserve currency.
The forex market is extremely popular due to its global reach, high liquidity, 24-hour trading sessions, and the large number of factors that can influence pricing. Including political events, pandemics, economic factors and much more.
Forex also tends to have relatively low volatility compared to other markets. Because of this, using leverage when trading currencies can produce excellent results and is common in this market. Leverage can also magnify any losses, so it is important to understand the risks involved.
Forex trading is the exchange of one currency for another in the foreign exchange market, aiming to profit from the fluctuations in the price of each currency during the exchange. Traders can consider many fundamental factors before choosing which assets or trading pairs they will trade. Technical analysis and trading strategy play an important role here.
Most foreign exchange exchange occurs between banks, but individual traders can also open an account with a broker. Some brokers allow direct trading of currency futures, while others provide the option to use CFDs.
As you already know, Forex trading involves exchanging one currency for another. All currencies in the forex market are pegged to another currency as a trading pair. The most common base trading pair is the US dollar, as this currency acts as the global reserve and dominant currency in the world.
Forex price charts are the same candlestick or line charts that you would analyze when trading any other type of asset. Forex charts show how many units of a quote currency are needed to purchase one unit of the base currency. All currencies use the ISO currency code as their ticker symbol.
An endless number of factors can affect the value of each country's currency and then, depending on the currency pair, create a unique trading opportunity.
Presidential elections, wars, sanctions and more can also have a strong impact on price fluctuations. Certain news events and quarterly reports, unemployment claims and more may also affect the markets.
Where is the forex market located?
The US stock market is located on Wall Street. The London Stock Exchange is located at 10 Paternoster Square. Where do you think the forex market is?
The answer is nowhere! Forex has no central location. It is not processed on a single trading platform, as is the case with stocks. Trading is carried out 24 hours a day through electronic communication channels (ECN) on various platforms around the world.
ECN is a computer system that enables secure trading of financial instruments. The Securities and Exchange Commission authorized the creation of the ECN in 1998. The forex market does not need a physical location as it uses this system.
You may have heard that London is the world's center for the foreign exchange market. This is because the London trading session accounts for about 35% of all trading. That's double the New York trading session, which accounted for just 17% of the day's total trading volume.
Trading participants in the forex market
There are many participants in the Forex market:
Central banks
Central banks are one of the main participants in the foreign exchange market. The open market transactions they can undertake, as well as interest rates, largely determine exchange rates.
Central banks decide how their country's currency will be valued in relation to the currencies of other countries. Exchange rates can be floating, fixed or pegged (when the rate of one currency is tied to the value of another).
Transactions in the foreign exchange market are carried out to stabilize or increase the competitiveness of the economy of a particular country. Central banks conduct foreign exchange interventions, devaluing or increasing the value of their currencies. For example, a central bank can weaken a national currency by creating an excess supply of that currency. This makes it possible to reduce the cost of goods and make the country’s exports more competitive.
Commercial banks
The largest volume of all transactions occurs in the interbank market. Banks buy and sell currencies among themselves through electronic systems, and also carry out currency exchange transactions for their clients. When banks exchange currencies for customers, the difference between the cost of the currency to buy and sell is the bank's income.
Hedge funds
Hedge funds are the second largest team of participants in the foreign exchange market. A hedge fund may buy or sell currencies to trade stocks, bonds or futures. Also, some of the hedge funds engage in speculative currency trading as part of their own investment strategies.
Companies
Companies that are involved in exporting and importing make exchange transactions on the forex market to pay for goods and services needed in their activities. Consider the example of a German car manufacturer that imports some American parts and then sells the assembled cars in China. After the final sale, it is necessary to convert Chinese yuan back into euros. The company must then then exchange the euros for dollars to be able to buy American parts.
Companies also use Forex trading to hedge their risks associated with currency transactions. The same German company may buy American dollars in advance before purchasing parts from an American company, in order to reduce future risks if the dollar increases in value.
Retail traders
The trading volume of retail traders is extremely low compared to banks and other financial institutions.
How to buy and sell currencies on Forex?
There are many different currencies of many countries in the world. However, the majority of international currency trading occurs in the US dollar, euro and yen. Other common currency pairs include the British pound, Australian dollar, New Zealand dollar, Canadian dollar and Swiss franc.
Forex trading involves a currency pair, so you bet on the value of one currency against another. Let's take the most traded currency pair in the world, EUR/USD. EUR is the base and USD is the quote. The price for EUR/USD indicated in your trading platform is worth 1 euro to 1 dollar.
In Forex you will have two prices. One is the purchase price and the other is the sale price. The difference between these prices is called the spread. When you decide to buy or sell, you buy or sell the first currency in the pair.
Let's say you decide that the euro will rise in value against the dollar. Since the Euro is the first in the EUR/USD pair, you buy EUR/USD. If you think the euro will fall in value against the US dollar, you sell EUR/USD.
Let's assume the buy price for AUD/USD is 0.8065 and the sell price is 0.8060, then the spread will be – 0.5 points (0.8064 – 0.8060 = 0.4). If the price moves in your favor, you make a profit on your trade.
Currency pairs
In forex, you will always trade a currency pair, not one specific currency.
If we take the EUR/USD pair, you are exchanging euros for dollars.
Here are the seven major currency pairs (majors): EUR/USD, GBPP/USD, AUD/USD, NZD/USD, USD/CAD, JPY/USD, CHF/USD.
On the charts you will see numbers that indicate the value of a currency pair in relation to another. For example, EUR/USD 1.1792. What does 1 euro cost 1.1792 dollars?
Pips on Forex
One step of Forex price movement is called a pip (price interest point), which is the smallest incremental value for a currency pair.
Most currency pairs are quoted to four decimal places, except for the yen pair, which is quoted to two decimal places.
A price movement of 0.0001 is one pip of price change. For example, if the EUR/USD currency pair costs 1.1702, and an hour later the price has changed to 1.7063, then the price has changed by 61 pips.
What is CFD?
CFD stands for Contract for Difference and is an agreement between two parties to subsequently settle a contract for any difference between the opening and closing price of an underlying asset.
Trading CFDs is the best way to gain exposure to forex currencies without having to own the underlying asset itself. It also allows traders to enter and exit positions much faster and more efficiently.
Because CFDs are contracts, they allow you to use leverage as well as go long and short. A CFD trading platform often has lower fees and requirements compared to traditional stock brokers.
Forex trading sessions
The Forex market starts with the Asian trading session, then the European session, then the American one, and then the Asian one again.
However, not all trading sessions are created equal. The European session is the most volatile, followed by the American and Asian sessions, which are the least volatile. Therefore, if you are a short-term trader, try to make most of your trades during the European session.
Forex spread
When trading Forex or any other trading, traders are provided with the buying and selling price.
The spread is the difference between the bid and the ask.
Bid is the price at which you can sell a currency pair (always a lower value).
Ask is the price at which you can buy a currency pair (always a higher value).
If you see the EUR/USD currency pair, which is quoted at 1.1651/1.1652, this means that if at the moment you want to sell, the price for you will be 1.1651, and if you want to buy, the price will already be 1.1652. Spread is a kind of commission to the broker that we pay for each transaction.
Leverage
Leverage allows traders to borrow a portion of their funds from a broker to make larger profits. By investing a portion of your capital into leverage, you can multiply any potential profit or loss by the multiple of your chosen leverage level.
For example, if a trader opens a $100 trade with 100x leverage, your trading position will have a trading potential of $10,000.
Any profit will also be multiplied by 100 times. However, losses will also be multiplied by the same factor, so there is a risk of significant losses if you do not use proper risk management strategies.
Margin
Margin is often incorrectly used as a synonym for leverage, but in reality margin is simply the equity in a trading account that is available for use as leverage.
If a margin call occurs as a result of you not having sufficient margin to cover all positions, there may be a risk of your positions being liquidated. To avoid such situations, you may need to fund your account or close positions. Traders should always have sufficient margin in their trading account.
Volatility
Volatility is what drives all price movements and therefore profitability in financial markets.
Generally, the higher the volatility, the greater the opportunity for profit. There are various tools, such as Bollinger Bands, that can help traders understand when explosive moves may occur.
Items
Pips are a way of describing a unit of measurement that expresses the change in value between two currencies. Most often this is the last decimal place in the currency price ticker.
Lot
Lots represent a set amount of currency in an order. The standard lot size is usually 100,000 units of currency, and there are also mini, micro and nano lots.
Order types
There are three types of orders: market order, limit order, stop order.
A market order allows you to open a trade at the current market price. This order is used when you want to open a trade right now and are willing to pay the current price. Typically this order is used in long-term trades because the entry price becomes less important and it is better to enter the market now than to miss a potential move.
A limit order only opens a trade when the market reaches your desired price. For example, the current price of EUR/USD is 1.1651, and you set a buy limit order at 1.551. This means that your trade will be executed and you will only buy EUR/USD at 1.551 when the price drops to this value.
Limit buy order – you open a buy trade when the price drops to your desired value.
Limit sell order – you open a sell trade when the price rises to your desired value.
This type of order is convenient to use in short-term transactions, because we have the opportunity to enter at the best price
A stop order only opens a trade if the price has moved in your favor (the opposite of a limit order). For example, the current price of EUR/USD is 1.1651, and you place a buy stop order at 1.751. This means that your trade will be executed and you will only buy EUR/USD at 1.751 when the price rises to this value.
Stop buy order – you open a buy trade when the price rises to your desired value.
Stop sell order – you open a sell trade when the price drops to your desired value.
Stop loss order
A stop loss order closes your trade when the price moves against you. It is very important to always set a stop loss because it protects your trading account from even more monetary losses.
Here's how it works. In a long position, the stop loss (red dotted line) will always be below the entry price (green dotted line).
In a short position, the stop loss (red dotted line) will always be higher than the entry price (green dotted line).
The Forex market can be very treacherous. There will often be situations where your stop loss will be hit by a random price movement, and only then will the price begin to move in your direction. Therefore, you should always place your stops thoughtfully, leaving enough free distance from the entry point.
Fundamental Analysis
Fundamental analysis examines economic data and political events as they directly affect the strength or weakness of a country's currency. There is a lot of fundamental data that comes out every day. You must pay attention to data that is important to price movement and filter out those that are unimportant.
At this point, some of the most important data you should know is:
The number of jobs created per month in non-agricultural sectors of the economy (Nonfarm Payrolls). Published on the last Friday of every month. They indicate the strength of the American economy as they reflect the new jobs created over the month.
Meeting of the Federal Reserve System (FRS). The Federal Reserve System is the central bank of the United States. This meeting discusses how well the U.S. economy is performing and makes decisions to increase or decrease the interest rate.
Meeting of the European Central Bank (ECB). The ECB is the central bank for European countries that use the euro as their currency. This meeting discusses how well the Eurozone economy is performing and decides whether to increase or decrease the interest rate.
The economic calendar can be viewed on various websites. Take into account only the most important news.
Technical analysis
Unlike fundamental analysis, which uses economic data, technical analysis only considers price movement on a chart. Price movements can be analyzed using mathematical formulas and indicators can be created to help us analyze the market.
The essence of technical analysis is that all market information is reflected in the price – and that is all you need to know to trade successfully.
An important tool in technical analysis is support and resistance levels. Support is a zone on the chart with potential buying pressure. Resistance is a zone on the chart with potential selling pressure. What is the use of support and resistance? They allow us to get the best entry point into the market.
Moving averages smooth out price movements on the chart. There are different types of moving averages, but it doesn't really matter which one you use. The moving average is used to determine the trend direction, trend strength, find an entry point, set a stop loss and for a trailing stop.
Forex candles
Forex candles are the most convenient way to display price movement on a chart. One candle shows the initial, maximum, minimum and last prices over a selected period of time.
This information is very important in trading. Also, candles by themselves and in combination with other candles form candlestick models and patterns. They can be used to predict further price movements.
How much money do you need to start?
Before trading with real money, it is best for a new trader to try trading on a demo account first. You may have heard other traders say that trading on a demo account will not replace learning on a real account and will not give you real emotions and a feel for the market. In part, this is true. But still, it is better to start with a demo account and try to achieve profitable trading there before you start trading with your own money. In addition, a demo account will allow you to understand the trading platform, give you the skill of opening new orders and managing transactions.
So how much money do you need to start trading forex? There is no magic formula because it depends on your personal finances, risk tolerance and other circumstances. But I suggest you the following approach:
- Determine the amount of money that you are willing to safely lose, and the loss of this amount will not affect your lifestyle in any way.
- Put half of this amount in your bank.
- Use the other half in trading.
- When you earn consistently, you can put the second part of the amount into your trading account.
The benefit of this approach is that you pay less in tuition fees because half of your money is in the bank. And when you really feel like you're trading profitably, you can scale your way up by adding funds to your trading deposit. This is not a get rich quick scheme, but a way that will keep you in trading for many years, which is much more important.
